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Technical indicators are key tools for a trader, facilitating the analysis of data on financial charts. They help to transform complex data into clear signals for decision making. It is almost impossible to find a trader who does not know about the existence of these tools today.

Today's traders can easily integrate various indicators into the charts of trading instruments thanks to computer technology. The process consists of pressing a few keys in the trading platform interface. The terminal will automatically perform all the necessary calculations according to the set parameters and present the indicator in the form of a chart, which will be convenient for analysis.

A trader must be able to correctly interpret the data presented in the form of charts in order to make correct forecasts about buying or selling of specific financial assets on their basis. In the arsenal of most trading platforms there are many common indicators that help in analyzing the market.

1. moving average indicator[]

The moving average indicator is widely used in financial markets to analyze and determine the main direction of price movement. It helps to eliminate random fluctuations and identify key trends. To form each point of this indicator, the average value of prices in a given period of time is taken, which is called the moving average period.

When using moving averages in market analysis, an important parameter is the time during which the average price value is calculated. If this time interval is increased, the moving average line becomes smoother and less affected by minor price fluctuations. In contrast, if this period is shortened, the line reflects more details of market activity, reacting to every significant price change.

When analyzing the market, it is important to set the moving average (MA) period correctly. The main objective is to filter out market noise without missing meaningful trends in price movement. The simplest way to apply MA is to track the points where the price chart crosses the moving average. If the price goes up and crosses the MA from below, this can be considered as an opportunity to open a buy position. In case the price goes down and crosses the MA from above, it can be a sell signal.

Types of moving averages and their effectiveness

Various types of moving averages are widely used in financial markets. The main ones are:

  • Simple Moving Average (SMA): often shows better results due to the simplicity of the concept.
  • Weighted Moving Average (WMA): gives more weight to recent data.
  • Exponential Moving Average (EMA): reacts to price changes faster by taking into account all previous values.
  • Modified Moving Average (MMA): an improved version of the SMA with a smoother chart. To get a deeper understanding of the mechanisms and calculation principles of these indicators, their signals and application, it is recommended to read additional literature.

2. MACD: Varieties of representation[]

MACD, widely used in technical analysis, is based on the interaction of two Moving Averages with different time frames. There are two forms of displaying this indicator: through two lines and with the help of a histogram. The linear method of visualization works with the "fast" and "slow" lines, while the histogram reflects the difference between them in the form of bars changing in time.

The MACD indicator, created by Gerald Appel, founder of Signalert Corporation, is used to study the dynamics and power of trends in financial markets. Its main task is to identify points of potential price reversal. The name of the indicator comes from the English phrase denoting the convergence and divergence of moving averages.

MACD trading signals

MACD indicator is used by traders to determine the moments of entering and exiting trades. It is recommended to buy an asset when the fast line crosses the slow line in the ascendant direction. It is recommended to sell the asset when the same fast line crosses the slow line, but in a descending order. Special attention in the analysis should be paid to the divergence of MACD indicator readings and price movements, which is called divergence - it can be a harbinger of significant changes in the market.

When trading, it can often be noted that MACD shows the most accurate results in conditions of low market volatility, when price fluctuations are not pronounced (flat), as well as when analyzing using data for long periods of time, such as weeks or months. Using this tool over short time periods can lead to an increase in false alarms.

3. Advantages and disadvantages of the Momentum indicator[]

Momentum indicator is a popular analysis tool in financial markets due to its simplicity and ease of interpretation. It is defined as the difference between the current value of an asset and its value for the previous fixed time interval, known as the indicator period. This difference reflects the earnings or loss from a transaction with a unit of the asset for a given time interval.

Momentum indicator is used to determine the presence of a price movement trend in the market, indicating its direction. Values above zero indicate an uptrend, and values below zero - a downtrend. A change in the sign of the indicator value indicates a change in the trend movement.

The main point to pay attention to when using this indicator is the moment of crossing the zero line. This change indicates the change of the dominant trend at the current moment. If the indicator value goes from positive to negative, the market gives a signal to sell. In case of change from "minus" to "plus", it signals a buying opportunity.

4. Relative Strength Index (RSI) and its role in trading[]

The Relative Strength Index, or RSI, is widely used in trading due to its visibility. It helps traders to judge the strength of the current trend and predict possible reversals.

Particular attention should be paid to the moments when divergence occurs: a discrepancy between the movement of the asset price and RSI indicators. For example, if the price reaches a new peak, but the indicator does not show this peak, the probability of a trend reversal increases.

5. Volume indicator[]

A distinctive feature of the volume indicator is its supporting role in analyzing market trends. Unlike other technical analysis tools, it is not aimed at direct provision of buy or sell signals. Its task is to assess the dynamics and power of market movement.

The indicator of the volume of transactions in the financial market reflects their number for a certain time interval. High volume in the price movement indicates a significant support for the trend, which increases the chances of its continuation. This tool is often used to confirm patterns of technical analysis.

For example, in the "head and shoulders" pattern, the growth of volumes at the stages of asset value decrease and their decrease at price growth serve as a strong confirmation of the reliability of this model.

Volume indicator and level breakout validation

Trading volume indicators can be key in assessing the validity of price level breakouts. When price breaks a certain level with increasing trading volume, this can indicate the authenticity of the breakout. In contrast, if volume decreases after breaking a price barrier, there is a possibility that the breakout is invalid.

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